Gold finds support in riskier assets overheating

After rising 0.71% last week, the U.S. gold futures will likely finish on a positive note again. Week-to-Thursday, the gold futures surged 1.82%, touching a high of $1,697.80 on Thursday. The crude oil futures also jumped to a four-month high of $95.49 on Thursday. The S&P 500 index climbed 0.60% this week while the Euro Stoxx 50 index rebounded from its early sell-off, and was flat. The Dollar index failed to break 80, and inched up 0.16% this week, after falling 1.16% last week.

Improving Sentiments for Europe, the U.S. and China

Market sentiments toward the EUR/USD have changed substantially compared to a year ago. The Euro has risen against 30 of its 31 closest trading partners since July 2012. The chair of the Eurogroup and other major investment houses are seeing an even stronger EUR/USD — as high as $1.40 in 12 months' time. This is because of capital flow coming back to Europe, and more stable financial market conditions. The December U.S. housing starts beat the forecast, and advanced at an annual rate of 954,000, compared to 851,000 in November. Last week, the unemployment filings in the U.S. dropped to a five-year-low at 335,000. Gold prices reacted badly initially to the stronger U.S. data. China re-accelerated and grew at an annualized rate of 7.9% in Q4 2012, beating the expectation of 7.%8. In 2012, China's GDP grew 7.8%, beating the median estimate of 7.7%.

Other Pockets of Worry

Yet, the manufacturing data in the Northeast U.S. showed unexpected weakness, raising hopes that the U.S. will continue its stimulus program, therefore supporting gold prices. Both the Philadelphia's general economic index and the New York fed data fell much more than anticipated. The Philadelphia index plunged to -5.8 from +4.6 last month while the New York index dropped to -7.3 from -4.3 in November. The Fed and some large investors are sounding alert on the overheating of the riskier assets as the Fed has been buying $85 billion of bonds each month. Junk bond yield has gone lower than leveraged loan yield this week. More asset inflation is better for gold prices.

Next Week's Watch

As we mentioned on Wednesday, keep your eyes on the European Finance Ministers meeting, the Bank of Japan monetary policy meeting, and the PMI data from China, Euro-17 and the U.S next week.